Will Netflix make Switzerland to see red?

The giant Netflix arrives in Switzerland this fall. Not sure that everybody see it with a positive eye. When you are in a market like the USA with 2’218 tv channels, probably Netflix represents only another alternative. Market segmentation is already super high so one more or one less would not change a thing. 20 years ago, the Cosby show was the biggest show in terms of audience in the USA. Every time, the popular TV show would gather 27 million people. Today, the most popular show in the USA is American Idol and it gathers “only” 9 million viewers. So Netflix just answers to a cluster need and TV channels are enough powerful to basically just keep doing what they know to do best. So Netflix will be a giant among Titans. What will happen with a small country like Switzerland?

Netflix, the Millennial hero?

If you think that Netflix is a kind of startup founded yesterday by a couple of teenagers still in high-school, you are wrong. Netflix was founded in 1997 by Reed Hastings. He was 37 years old when he sold his previous company called Pure Software for $ 75 million. He decided then to create Netflix with a high skilled developer called Marc Randolph. Today Netflix has more than 2’000 employees. In 2012 Netflix sales were $ 3.61 billion for a net revenue of $ 17 million. The company has gone already abroad the USA, with presence in all North America, some countries in South America like Brazil and already a strong presence in Europe: Sweden, Finland, Ireland, Netherlands, Norway, Denmark and the UK. This year Netflix is extending its presence to new 5 European countries: France, Germany, Belgium, Spain, Italy and Switzerland.

In 2013, Netflix alone was responsible for 27% of total USA bandwidth. More than 1’000 devices are compatible with Netflix, from Boxes, to connected TVs, Amazon Kindles, Tablets and Smartphones. In 2013, according to Netflix, 33% of all Americans from 20 to 50 years old had a paid subscription to Netflix. For $8 per month you can have unlimited access to more than 100’000 titles. Try to compete with that. Even Apple decided not to go that way and allow Netflix to be embedded in the Apple TV. The power of Netflix is to propose customized content, in HD for a cheap price. Watching content from the internet is not a geek thing anymore. SmartTVs and other boxes allow my grand-mother to watch online content without even noticing where the content is streamed from. Of course Netflix geographical expansion follows the quality of internet network. That’s why they started in Europe by Scandinavia and the Northern countries. HD is everything. Another strong point of Netflix is that they understood the power of streaming their own content. While most of the successful tv series were produced and owned by the big TV channels, Netflix would always pay a lot of copyrights and usage licenses ad the content did not belong to them. That’s why they started producing their own tv shows and we must say that they are all big hits. “Orange is the new black” and “House of Cards” are massive broadcast successes and there is still a lot to come. Multiple screens also amplifies the user experience by allowing a multi-usage of moments and devices. It can either increase the media consumption or it can adapt the content for specific target groups. Netflix understood perfectly the evolution of the internet generation and now it is basically harvesting the first prize.

Will Switzerland resist to Netflix or the other way around?

Switzerland is probably a very complex country for an American company like Netflix. The USA market is a simple country in terms of : 1 language, 1 currency and one land. Switzerland is a 8 million people country with more than 200 tv channels. We have local tv in each big city, there is national television coverage and international channels coming from all neighbors countries like France, Italy or Germany. There is also 4 official languages: German, French, Italian and Romansch and we should add English for all the foreigners living in the country. Even German is considered as a foreign language as the true language is the Swiss-German, a local dialect spoke by 60% of the country. There is only one currency, the Swiss franc, but it is not a major one like Euros could be. So despite the fact the national income is pretty interesting for new high-tech markets and brands, the efforts to handle a small country like Switzerland with such complexity is hard. Take the example of Apple with the iTunes store. Apple never managed languages. They assumed that German was probably the best solution to set as main language which makes 40% of the country just mad. It would require a different set up on the Apple store back-end and the investment would be worthless for the size of the interior market. So every time you choose a video or an app, you need to check twice if it is available in your language, otherwise you end up with German. Sometimes it is not even available in other language than German anyway. Another broadcaster who get it all wrong is Youtube. If you are in Switzerland, you get most of the time advertising in German on Youtube. Either via the banners units you have on the youtube homepage and chanels or even more annoying, on the pre-rolls. With such a language and copyrights segmentation, it took a while for Netflix to find the correct formula for Europe. Now they seem to have their plan. Of course they need to find the right balance between a rich and interesting catalog versus an honnest price. In the USA the monthly subscription is $8, which frankly, it is not much. In a simple currency translation level, this would mean Sfr. 7.24. This price would be unbeatable. Of course we know that everything is much more cheaper in the USA. If we take the example of Spotify, it costs $9.99 in the USA, which would be Sfr.9.04 in Switzerland. Yet, the subscription to Spotify in Switzerland costs Sfr12.95 which in dollars gives $14.30. This means that the Spotify subscription in Switzerland is 43% more expensive. So if we would apply this rule to a potential subscription price for Netflix in Switzerland, it would be around Sfr11.50. It is a fair price to have unlimited access to a great catalog of content. The question is how big the catalog will be? Europe seems a mess around copyrights and there is also a rich Swiss movie industry, very specific, that never finds its way among all the Majors catalogs. If Netflix really apply their rule to Switzerland, it will hurt a lot of businesses. All VOD will probably need to align prices or die. Today you will pay Sfr 7.00 to Sfr8.00 to rent a HD video online or it will cost you around Sfr22.00 to purchase it digitally from the AppleStore. When you know that a cinema ticket costs in Switzerland around Sfr15.57 in average, you understand that Netflix has a strong margin in order to fix the price. Should television be worried? Probably not. They have specific content from entertainment to documentaries and news that will live. And when a good movie will go on air in a TV channel, nobody will compete with that.

is Netflix the killer solution to piracy and illegal streaming?

Certain studies tend to show that the first adopters of Netflix are digital active in terms of content consumption. It means there is a big percentage of the first customers of Netflix who used to buy movies and series online already via other services like Amazon or Apple online stores. Most of these people used and still use to download or stream illegally content online as well. So they are digital savvy and have connected TVs or have connected their computer to the TV or have an Apple Tv or watch content online directly from their computers, tablets or smartphones. This target audience has already either quit traditional television or have segmented their consumption anyway. So probably Netflix can be a qualitative alternative to the existing online broadcasting. Of course $8 seem not much but it is a huge amount of money in countries in which online piracy is developing like Brazil, India, Indonesia or Vietnam. If we take the example of Brazil, we can see that pirates and legal Netflix customers are both growing. According to Comscore, Netflix delivered 2.7 billion impressions for ads in 2013. It shows how intense the activity is. Yet, illegal movie downloads in Brazil represented $1.5 billion loss. $8 is still a long way to emerging countries. In rich countries like Switzerland, Netflix might cover some frustrations in terms of online offer. There is still a lot of details to be revealed and that are crucial for the success of such business in Helvetia.

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